Educational Articles

Restaurant Roundup — April 10, 2014

Erik M. Manning
| April 10, 2014

Sonic Kicked Off Earnings Season on a Positive Note

In late March, Sonic (SONC) announced good second-quarter results (fiscal years end August 31st). America’s Drive-In, the nation’s largest chain of drive-in restaurants with more than 3,500 locations, reported that adjusted earnings advanced by two pennies a share, to $0.07. This topped most analysts’ expectations and bucked the recent industry-wide trend of blaming lackluster operating performances on bad weather. Diving deeper, other metrics were positive, including system wide same-store sales growth of 1.4% and operating margin expansion (aided by strict cost-management, more-effective marketing, and innovative usage of technology) of almost 70 basis points. Sonic also increased its share-repurchasing efforts, and it remains committed to its expansion plans. We think fiscal 2014 will shape up to be a very good year for Sonic, and we advise investors to at least keep an eye on SONC.

While Sonic makes up a very small slice of the greater restaurant industry, the recent positive performance could bring in some much-needed optimism. The sector, in general, was plagued by bad weather in the December quarter, and conditions did not seem to improve all that much in the first few months of 2014. Even industry stalwarts McDonald’s (MCD - Free McDonald's Stock Report) and Chipotle Mexican Grill (CMG) reported ho-hum results (by their impressive standards) to close out last year, which put a tremendous amount of pressure on many players in this space. If other restaurant operators can follow suit and post favorable year-over-year comparisons when first-quarter earnings are announced later this month, we think investors may start coming back to the industry, lifting valuations in the process.

Expectations Are High For the Industry Heavyweights

Speaking of McDonald’s and Chipotle, we feel we would be remiss not to mention the fact that expectations for 2014 are high. For McDonald’s, most are looking for 5% share-earnings growth this year. While this does not sound like much at first blush, the company is obviously very mature and profit growth has been well below this threshold for the past several years. Most analysts are looking for 20%-plus bottom-line growth for Wall Street darling Chipotle, and we think this target is achievable, given ongoing expansion efforts, the potential for menu price increases, and rising foot traffic. Finally, Yum! Brands (YUM) is expected to have a very strong 2014, especially compared with the relatively weak showing reported last year. Share net ought to rebound to the tune of over 20%, thanks to the booming China business.

Could BJ’s Restaurants Growth Story Pick up Where It Left Off?

Shares of BJ’s Restaurants (BJRI), owner and operator of casual dining establishments that feature a broad array of cuisines, were on quite a run between late 2008 and late 2011, rising more than eight-fold in the three-year stretch. The last two years have been rocky, however, as profits have been declining amid lackluster operating conditions. The stock has been pulled down (along with most in the casual dining space), but we think the tide is starting to turn. The stock got a nice boost in early March after activist investors announced a shake-up on the board of directors, and we look for more gains in the not-too-distant future. Foot traffic will eventually begin picking up again, sooner than later if the domestic economy keeps improving. Meanwhile, BJ’s ought to continue differentiating itself with innovative menu concepts, loyalty programs, and new mobile technology. There is plenty of room for expansion, too. (The goal is to eventually operate 425 restaurants, up from just 150 now.) All told, we think this is still an attractive growth story, and recommend BJRI to any value-seeking investors with a longer-term horizon.

Checking in on Wendy’s

Shares of Wendy’s (WEN), our selection for 2014, have traded a bit lower since we made our call early last month, but we are sticking to our guns. The world’s third-largest quick-service hamburger company reported better-than-expected earnings ($0.11 a share versus the consensus target of $0.09) for the quarter ended December 29, 2013, despite the adverse impact of winter weather, and it reaffirmed its very positive outlook for 2014 and beyond. The company has a lot going for it: a recently undertaken brand transformation initiative is well under way and accelerating even; same-store metrics have been favorable for some time now; and the chain just finished a system optimization program that should lower costs markedly in the coming years. All told, we think earnings growth will remain in the double digits for the next few years, and we expect WEN shares to keep climbing between now and 2017-2019.

At the time this article was written, the author did not have positions in any of the companies mentioned.